30 June is approaching, have you thought about…

With the end of the financial year just around the corner, it’s a good opportunity to step back and highlight some of the significant tax changes ahead, and draw your attention to some of the key tax planning strategies you might like to consider before 30 June.

If there is something in particular that you’re interested in knowing more about, feel free to give us a call on 3233 6400.

Individual Considerations

Is a motor vehicle being used for work-related purposes?

If the business use proportion of your motor vehicle is substantial, ensure that you keep an accurate and complete logbook over a 12-week period. The start date of the logbook must be prior to 30 June 2018 to be applicable for the 2018 financial year. You should ensure to record the odometer readings at 30 June 2018 and keep a record of all motor vehicle expenses incurred. Alternatively, there is the option to claim up to a maximum of 5,000 business kilometres (based on a reasonable estimate) using the cents per kilometre method

Defer Capital Gains Tax (CGT) and realise losses

If assets are likely to return a profit on sale, CGT can be deferred by ensuring the sale contract is dated after 30 June 2018. It is important to note that the capital gains tax discount will only be available where the asset is held for longer than 12 months. If a capital gain has been realised in the 2018 financial year you may wish to consider selling any non-performing assets or investments before 30 June 2018. The capital loss can be utilised to offset any capital gains and can be carried forward to offset future capital gains. We encourage you to contact us should you be considering a significant purchase or sale to ensure the most tax advantageous position is achieved.

Do you have income protection insurance?

Income protection insurance generally replaces up to 75% of your salary if you are unable to work due to sickness or an accident. The premium is generally tax deductible if bought as a stand-alone policy (i.e. not through your superannuation fund).

Maximise your work-related deductions

Ensure to keep receipts and records of any work-related expenses incurred such as uniforms, training courses, learning materials and travel, as these may be tax-deductible

Maximise your donations

Any tax-deductible donations should be made before 30 June 2018. Note that the deduction must be claimed in the return of the individual whose name is on the receipt.

Consideration for rental property owners

Rental properties are high on the ATO’s radar, particularly with landlords looking to increase deductions before the end of the year. The following should be taken into consideration when reporting your rental income for the 2018 financial year:

Repair vs. capital improvements – Genuine repairs that relate directly to wear and tear as a result of renting the property will generally be tax deductible in the year they are incurred. This generally relates to replacing or renewing a worn out or damaged item. Alternatively, new or improved items are likely to be capital in nature and can be written off over a number of years. For example, replacing an entire fence is likely to be capital as opposed to repairing a few broken palings.

Renting to family members – If you or family members have used the rental property throughout the year all expenditure will need to be apportioned between private and investment. To be considered non-private use, rent needs to be charged to the family member on arms-length terms, i.e. generally at market value.

Travel Deductions no longer available – From 1 July 2017, investment property owners can no longer claim deductions for travel expenses in relation to inspecting the property, etc.

Limitations to depreciation deductions – From 1 July 2017, deductions for depreciation will be limited to:

plant and equipment actually purchased by the investor, or

assets forming part of a brand new property where:

No one has previously claimed depreciation on the assets; and

No one lived in the property when you acquired it or you purchased it within 6 months from the date the build was completed.

This means that if you purchase a rental property (other than a brand new property) you can no longer claim depreciation for assets already at the property (e.g. oven, hot water system), only new assets that you purchase from a retailer.

Existing investment properties can continue to claim deductions for plant and equipment forming part of the property as at 9 May 2017, provided that any private use of the property is only minor, infrequent and irregular.

Deduction for interest expenses

Interest is deductible to the extent it is incurred in gaining or producing assessable income or in carrying on a business for that purpose and is not of a capital, private or domestic nature. Where a loan is taken out for two purposes, one business and one non-business, only a proportion of the interest will be deductible. Some of the situations in which interest may be deductible include:

Where the money is borrowed to acquire shares, if it is reasonably expected that dividends will be derived from the investment. Interest will not be deductible where the shares are acquired solely for the purpose of making a capital profit on their resale.

Where the money is borrowed to acquire units in a split property unit trust

Where the money is used to purchase a rental property

Net medical expenses tax offset phase out

The offset can only be claimed for expenses relating to disability aids, attendant care or aged care. The offset will be abolished completely from 1 July 2019.

Superannuation Considerations

Maximise your concessional contributions

For the 2018 financial year, the maximum employer or personal tax-deductible contributions that can be made are limited to $25,000 for everyone regardless of age.

If you are wishing to ‘top-up’ your superannuation you should consider approaching your employer about salary sacrificing or making a personal tax-deductible contribution. From 1 July 2017 anyone is able to make a personal superannuation contribution and claim it as a deduction in their personal income tax return subject to the contribution cap (previously the ability to do so was only available to individuals where 10% or less of their income was from employment). To claim a deduction a ‘notice of intention to claim a deduction’ must be lodged with your superannuation fund.

If you are aged 65 to 74 you must pass the work test before making contributions to superannuation. Individuals aged 75 and over can only receive the 9.5% superannuation guarantee contribution on their wages.

Maximise your non-concessional contributions

The non-concessional contributions cap for the 2018 financial year is $100,000. Non-concessional contributions are only permitted if your ‘Total Superannuation Balance’ as at 30 June 2017 was less than $1.6million.

If you are under 65 years of age, you are permitted to utilise the 3 year bring forward method and make 3 years worth of contributions in one go and sit out for the next 2 years. If your ‘Total Superannuation Balance’ at 30 June 2017 was over $1.4million, modified rules apply to reduce the amount you can contribute under the bring forward method.

If you are aged 65 to 74 you must pass the work test before making contributions to superannuation.

Division 293 tax for high-income earners

Individuals earning over $250,000 adjusted taxable income are subject to an additional 15% tax on concessional contributions.

Spouse Contribution Tax Offset

From 1 July 2017, the income threshold for eligibility for a spouse contribution tax offset will increase. An offset of up to $540 per annum (18% of the contribution) will be available where a contribution (up to $3,000) is made for a spouse and their income is less than $37,000 per annum (increased from $10,800). Eligibility for the offset will cease where the spouse’s income reaches $40,000 per annum.

The contributions count against the non-concessional contributions cap and an offset not available if it gives rise to excess non-concessional contribution for the spouse or their total superannuation balance at 30 June 2017 is equal to or greater than the general transfer balance cap (currently $1.6million).

Business Considerations

Is your business a “Small Business Entity”?

From 1 July 2016, the Small Business Entity turnover threshold increased from $2 million to $10 million. This means that if you carried on a business during the year and the business has an aggregated turnover (your annual turnover plus the annual turnover of any connected/affiliated businesses) less than $10 million you will be eligible for a range of tax concessions from the ATO.

Reduction in company tax rates and maximum franking credits for small business

The company tax rate reduction has been extended to companies with an aggregated turnover of less than $25million now eligible for this rate (up from $10million). To be eligible for the lower rate, the company must be a ‘base rate entity’. To satisfy this requirement, no more than 80% of a company’s assessable income can be ‘base rate passive income’ which includes: interest, rent, capital gains, partnership or trust distributions referable to passive income or dividends (excluding non-portfolio dividends – where you hold 10% or more of the voting interest in that company). If you now qualify for the reduced corporate tax rate, consider whether you can vary down your June quarter PAYG Instalment commensurate with your expected tax liability for 2018.

This reduced tax rate also limits the maximum franking credits that can be allocated to a franked dividend. To determine the franking credit payable you must determine what rate the company would pay based on the prior year’s aggregated turnover, base rate passive income and assessable income. E.g. a company that would satisfy the above requirements for a 27.5% rate based on their income for the 2017 year can only pay dividends with franking credits of 27.5% in the 2018 year.

Instant asset write-off for assets costing less than $20,000

Small businesses can immediately deduct the business portion of assets costing less than $20,000 that were purchased during the 2018 financial year. The asset must be ready and available for use prior to 30 June 2018. Also available is an immediate deduction for the balance of the small business pool if it is less than $20,000 at 30 June 2017.

It was announced in the 2018-2019 budget that the immediate write off will be extended by another year to 30 June 2019.

Small business concession for prepaid expenses

Businesses with a turnover less than $10 million can make prepayments, up to 12 months, on expenses (e.g. interest, rent, subscriptions, etc.) before 30 June 2018 and obtain a full tax deduction in the 2018 year.

Single Touch Payroll – are you ready?

From 1 July 2018 Single Touch Payroll will become mandatory for employers who had 20 or more employees on 1 April 2018. This new reporting requirement means that employers will have greater reporting obligations – click here for more details

The proposed start date for businesses with 20 or less employees is 1 July 2019.

Review of depreciable assets

All businesses should undertake a review of their depreciable assets to ensure that a deduction is claimed for any items lost, stolen, destroyed or scrapped during the year.

Ensure your employer superannuation contributions have been paid

The superannuation guarantee requires employers to contribute a minimum of 9.5% of their employee’s earnings to a complying superannuation fund at least every quarter. At the latest, the June quarter contributions need to be paid by the 28 July 2018 in order for them to be tax deductible and to avoid the superannuation guarantee charge. To claim a tax deduction in the 2018 financial year employer superannuation contributions need to be received by the superannuation fund before 30 June 2018.

Ensure bonuses paid are tax deductible

To ensure that bonuses incurred before the year-end are tax deductible employers should:

Evidence the bonus in writing prior to 30 June 2018

Determine the amount before the year-end

Ensure that the payment is not subject to discretion, review or confirmation at a later date

Ensure that employees are told the amount prior to the year-end

Is a motor vehicle being used for business purposes?

If the business use proportion of your motor vehicle is substantial, ensure that you keep an accurate and complete logbook over a 12-week period. The start date of the logbook must be prior to 30 June 2018 to be applicable for the 2018 financial year. You should ensure to record the odometer readings at 30 June 2018 and keep a record of all motor vehicle expenses incurred. Alternatively, there is the option to claim up to a maximum of 5,000 business kilometres (based on a reasonable estimate) using the cents per kilometre method.

Review of Work in Progress

Businesses are not required to pay tax on their Work In Progress at 30 June 2018 if in a profession where the services cannot be billed to the client until complete. If this is the case the business should carefully consider their Work in Progress before processing billings for 30 June 2018. Note that businesses in the construction industry are not considered to be in this category.

Write off bad debts

Ensure to review your Trade Debtors and write off all bad debts before 30 June 2018. To qualify for a deduction the book entries need to be processed before 30 June rather than at a later time (e.g. when the accounts are being finalised). If on the accruals method for GST you can also claim back any GST that was remitted on the original invoice on your next BAS.

Year-end stocktake

A physical stocktake must be conducted at the close of business on 30 June 2018. Review your listing and write-off any obsolete or worthless stock items. Trading stock can be valued using either cost price, market selling value or replacement price. Note that small businesses do not need to conduct a stocktake if the value of stock on hand does not fluctuate more than $5,000 from year to year.

Defer income and bring forward expenses

Businesses that assess income on a ‘cash’ basis, where possible, may wish to delay the receipt of income until after 1 July 2018. This has the benefit of reducing taxable income. For example, interest income on term deposits can generally be deferred if the maturity date is after 1 July 2018. It is important to note that when the ATO audits a ‘cash’ basis business they will look closely at banking in June/July to ensure there has been no artificial reduction at year end. Similarly you may wish to ensure purchases are made before 30 June 2018 keeping in mind that assets purchased before 30 June 2018 and costing less than $20,000 will be immediately deductible for small businesses.

Loans to shareholders/beneficiaries

If money has been withdrawn from a company or trust during the year it is possible that this could become a deemed dividend/distribution in the hands of the shareholder/beneficiary if “Division 7A” interest and minimum repayment requirements are not satisfied. This is a complex area and advice should be sought if this is the case.

Defer Capital Gains Tax (CGT)

If assets are likely to return a profit on sale, CGT can be deferred by ensuring the sale contract is dated after 30 June 2018. In addition the effective rate of tax payable on the gain can be reduced to 15% by salary sacrificing the taxable portion of the gain into your superannuation fund. Where the gain is realised after 30 June 2018 a salary sacrifice arrangement can be put in place where the amount is sacrificed over the entirety of next financial year. It is important to note that the capital gains tax discount, available to individuals, trusts and superannuation funds, will only be available where the asset is held for longer than 12 months. We encourage you to contact us should you be considering a significant purchase or sale to ensure the most tax advantageous position is achieved.

Wages to children

Salary and wages earned by individuals under the age of 18 are taxed at normal adult taxpayer rates, rather than at the higher rates that apply to “unearned income” of minors (i.e. family trust distributions). You should therefore consider paying wages to children who have worked in the business. If wages are paid they need to be paid at arms-length rates with periods worked documented and a PAYG Payment Summary will need to be prepared.

Defer termination payments

If an individual is nearing age 55 it is recommended that termination payments be deferred until they reach 55. This gives the individual substantial savings on tax rates and tax-free amounts of the payment.

Deduction for interest expenses

Interest is deductible to the extent it is incurred in gaining or producing assessable income or in carrying on a business for that purpose and is not of a capital, private or domestic nature.

Where a loan is taken out for two purposes, one business and one non-business, only a proportion of the interest will be deductible. Some of the situations in which interest may be deductible include:

Where the money is borrowed by a partnership to repay money advanced by a partner for working capital. This rule does not extend to co-owners of income-producing assets such as rental properties.

Where the money is borrowed to acquire shares, if it is reasonably expected that dividends will be derived from the investment. Interest will not be deductible where the shares are acquired solely for the purpose of making a capital profit on their resale.

Where the money is borrowed by persons in business for the purpose of paying income tax, in certain circumstances.

Where the money is borrowed to acquire units in a split property unit trust

The information in this article is general in nature. It does not take into consideration all your personal financial information, goals or objectives and is designed to bring your attention to the various options that may impact you. Please ensure that you seek the appropriate financial and taxation advice. Please contact us before 30 June 2018 to discuss your tax planning opportunities in more detail.